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How Does Enbridge's (TSE:ENB) P/E Compare To Its Industry, After The Share Price Drop?

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·4 min read
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To the annoyance of some shareholders, Enbridge (TSE:ENB) shares are down a considerable 37% in the last month. Even longer term holders have taken a real hit with the stock declining 26% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Enbridge

How Does Enbridge's P/E Ratio Compare To Its Peers?

Enbridge's P/E of 13.59 indicates some degree of optimism towards the stock. The image below shows that Enbridge has a higher P/E than the average (6.6) P/E for companies in the oil and gas industry.

TSX:ENB Price Estimation Relative to Market, March 13th 2020
TSX:ENB Price Estimation Relative to Market, March 13th 2020

Its relatively high P/E ratio indicates that Enbridge shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Enbridge's earnings made like a rocket, taking off 81% last year. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 11%.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Enbridge's Debt Impact Its P/E Ratio?

Enbridge's net debt is 89% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Enbridge's P/E Ratio

Enbridge has a P/E of 13.6. That's higher than the average in its market, which is 11.6. While its debt levels are rather high, at least its EPS is growing quickly. So it seems likely the market is overlooking the debt because of the fast earnings growth. Given Enbridge's P/E ratio has declined from 21.7 to 13.6 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.